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Dems join GOP in blocking the taxman

Five Democrats joined Republican lawmakers and leading conservatives to stop the Internal Revenue Service from getting into the tax-software-preparation market while House and Senate appropriators began meeting yesterday to sort out differences in the Treasury Department spending bill.

In a separate letter, Rep. John Sweeney (R-N.Y.), who serves on Knollenberg’s committee, wrote that the Senate amendment is a “timely and necessary provision that needs to be enacted into law in order to provide long-term policy direction to the Department of Treasury and the IRS.”

Knollenberg’s spokeswoman declined to comment.

Concern over whether the Senate’s provision will make it into a final bill stems from a deal the Treasury Department and the Free File Alliance, a coalition of tax-preparation-software companies, agreed to last month that allows taxpayers to access the companies’ services at the IRS’s website. In return, the companies agreed to provide free tax-preparation services for low- and middle-income taxpayers.

During the negotiations, GOP Sens. Kit Bond (Mo.), John Ensign (Nevada) and George Allen (Va.) supported an amendment, backed by the Free File Alliance, that directs the IRS to “provide taxpayers with free individual tax-electronic-preparation and filing services only through the Free File program.”

Officials of the Bush administration retaliated against the companies’ lobbyists and demanded that they sign a letter repudiating the amendment. The Treasury officials feared the amendment would weaken their leverage in negotiating future agreements.

Meantime, the issue galvanized conservative activists. Grover Norquist, the president of Americans for Tax Reform, voiced his support for the Senate amendment in a letter he sent last week to Knollenberg and in a separate letter signed by the leaders of 14 conservative groups. On his radio program, conservative radio personality Rush Limbaugh also lambasted the idea of allowing the IRS to file taxes.

Despite the threat, the two sides hammered out an agreement. But the Treasury Department officials began pressing House lawmakers to oppose the Senate amendment and to take the issue out of the appropriators’ hands and give it to the Ways and Means Committee.

The fight over the Senate amendment moved to a House-Senate conference committee, which started meeting yesterday to hash out differences between the House and Senate passed bills.

In another development, President Bush’s Advisory Panel on Tax Reform rejected a proposal that the IRS electronically prepare citizens’ tax returns.

Unlike most strange-bedfellow alliances, in which two sides have different motives to reach a common goal, Republicans and Democrats have focused their arguments on the notion that allowing the IRS to prepare taxes potentially would result in a massive government intrusion into a market dominated by private companies, as well as an invasion of taxpayers’ privacy rights.

“We remain concerned that the IRS continues to exhibit ambitions to take a more active role in the preparation of tax returns and the financial-services business, particularly given the inherent conflict of interest this arrangement would create,” the House Democrats wrote.

Some trade associations have taken sides in the dispute as well. The Computer & Communications Industry Association wrote to Knollenberg last week to voice its support of the Senate’s amendment, arguing that “what will be avoided through adoption of the Senate provision is another repeat of the relentless ambition of our government over the last eight years to try to extend its mission into providing consumer electronic commerce, including financial software.”

The Small Business and Entrepreneurial Council also voiced its support of the Senate amendment.